Note 6: Goodwill and Other Intangible Assets

Goodwill

We assess goodwill for potential impairment at the reporting unit level on an annual basis as of November 30, or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. During the three months ended June 30, 2015, it became evident that revenue and profitability trends in our ecoATM reporting unit were not being achieved as expected. For example collection rates, revenue and profitability on a per kiosk basis experienced declines versus prior periods and expected seasonal trends. As a result, we revised our internal expectations for future revenue growth and profitability lower than our previous estimates. This is primarily driven by certain challenges in an increasingly competitive industry which impact the per kiosk device collection, revenue and profitability expectations and the timing and installation of kiosks. Further, while these competitive challenges grew more acute during the second quarter, we also experienced the loss of a key executive at ecoATM. This led to an indication in the second quarter of 2015 that ecoATM’s fair value was more likely than not below its carrying value.

As a result, we performed the first step of the goodwill impairment test with the assistance of a third-party valuation specialist. The first step of the impairment test was completed by comparing the carrying value of ecoATM, including goodwill, to its fair value determined using a weighted combination of a discounted cash flow (“DCF”) income based approach and a guideline public company market based approach. The DCF methodology requires significant judgment in selecting appropriate inputs including the risk adjusted market cost of capital for the discount rate, the terminal growth rate and projections of future cash flows, all of which are inherently uncertain. The guideline public company method involves significant judgment in selecting the appropriate inputs including the peer company group, the selection of relevant multiples and the determination of a reasonable control premium. Due to these significant judgments, the fair value determined in connection with the goodwill impairment test may not necessarily be indicative of the actual value that would be recognized in a future transaction. Completion of the first step of the impairment test determined that the carrying amount of ecoATM exceeded its fair value and that the second step of the impairment test needed to be performed.

Under the second step of the impairment test, we completed the process of estimating the fair value of ecoATM’s assets and liabilities, including intangible assets consisting of developed technology, trade name and covenants not to compete for the purpose of deriving an estimate of the implied fair value of goodwill. The estimate of the implied fair value of goodwill was then compared to the recorded goodwill to determine the amount of the impairment. Significant assumptions used in measuring the value of these assets and liabilities included the discount rates and obsolescence rates used in valuing the intangible assets, and replacement costs for valuing the tangible assets. The inputs and assumptions used in our goodwill impairment test are classified as Level 3 inputs within the fair value hierarchy.

Based on the result of the second step of the goodwill impairment analysis, we recognized a non-cash, non-tax deductible charge for goodwill impairment of $85.9 million related to our ecoATM business segment in the second quarter of 2015.

As a result of the impairment recorded, the estimated fair value of the ecoATM reporting unit equaled its carrying value as of June 30, 2015.

Gross amount of goodwill and accumulated impairment charges that we have recorded are as follows:



Dollars in thousands
Goodwill	$	559,307
Accumulated impairment losses	(85,890		)
Net goodwill at December 31, 2015	$	473,417

Goodwill by Segment

A reconciliation of the beginning and ending carrying amounts of goodwill by segment is as follows:



Dollars in thousands	December 31, 2014		Goodwill Impairment			December 31, 2015
Redbox	$	138,743	$	—		$	138,743
Coinstar	156,351		—			156,351
ecoATM	264,213		(85,890		)	178,323
Total goodwill	$	559,307	$	(85,890	)	$	473,417

We elected to by-pass the qualitative assessment and performed the annual goodwill impairment test based on a quantitative analysis as of November 30, 2015. We estimated the fair value of our goodwill bearing reporting units using both the income and market approaches and reconciled these approaches to our enterprise market capitalization as of November 30, considering a reasonable control premium. Our estimates of fair value can change significantly based on factors such as revenue growth rates, profit margins, discount rates, market conditions, market prices, and changes in business strategies. As the estimated fair value of each reporting unit exceeded its respective carrying value in the first step of the goodwill impairment test it was not necessary to proceed to the second step and there was no additional goodwill impairment in 2015. Subsequent to our testing date of November 30, we also considered the change in our market capitalization between the measurement date and December 31, 2015 and subsequent to our fiscal year end. Considering factors such as the average price of our stock during 2015, in conjunction with the other methodologies and factors noted above, we determined that the decrease in our market capitalization did not change our conclusions made as of the measurement date.

The acquired assets and liabilities of Gazelle (See Note 3: Business Combinations for further information), are included in the carrying value of our ecoATM reporting unit. The estimate of ecoATM's fair value as of November 30, 2015, included the expected increase in our estimated future cash flows from the Gazelle acquisition. The expected future cash flows of our ecoATM reporting unit include key assumptions with inherent uncertainty which may change in future periods and may have a negative effect on the fair value resulting in potential future impairments, the most significant of which is our estimate of future cash flows predicated on estimated growth in kiosks, revenue and profitability measures. Additionally, fair value may be negatively impacted by changes in our strategy related to the ecoATM reporting unit and factors outside of our control such as increased competition from companies whose primary business consists of the purchase of used electronics and with companies in other businesses who also have buyback programs.

Excluding the impact of Gazelle on the fair value and carrying value of the ecoATM reporting unit, there have been no significant changes in our expectations for the ecoATM reporting unit from the June 30, 2015 valuation date, when the estimated fair value of the ecoATM reporting unit equaled its carrying value, to the November 30, 2015 annual measurement date, that indicated the carrying value of the ecoATM reporting unit exceeded its fair value as of November 30, 2015.

Other Intangible Assets

The gross amount of our other intangible assets and the related accumulated amortization were as follows:



Dollars in thousands	Amortization	December 31,
Dollars in thousands	Period	2015			2014
Retailer relationships	5 - 10 years	$	53,295		$	53,295
Accumulated amortization		(27,212		)	(23,200		)
Retailer relationships, net		26,083			30,095
Developed technology	3 - 5 years	36,000			34,000
Accumulated amortization		(16,544		)	(9,633		)
Developed technology, net		19,456			24,367
Trade names	5 - 10 years	20,000			6,000
Accumulated amortization		(3,133		)	(1,700		)
Trade names, net		16,867			4,300
Other	1 - 40 years	10,800			10,800
Accumulated amortization		(6,109		)	(4,871		)
Other, net		4,691			5,929
Total intangible assets, net		$	67,097		$	64,691

Amortization expense was as follows:



	Year Ended December 31,
Dollars in thousands	2015			2014			2013
Retailer relationships	$	4,012		$	5,432		$	6,250
Developed technology	6,911			6,800			2,833
Trade names	1,433			1,200			500
Other	1,238			1,260			1,350
Total amortization of intangible assets	$	13,594		$	14,692		$	10,933
Less: amortization included in discontinued operations	(44		)	(38		)	(26		)
Total amortization of intangible assets from continuing operations	$	13,550		$	14,654		$	10,907

Assuming no future impairment, the expected future amortization as of December 31, 2015, is as follows:



Dollars in thousands	Retailer Relationships		Developed Technology		Trade Names		Other		Total
2016	$	4,012	$	7,467	$	2,600	$	1,081	$	15,160
2017	4,012		7,467		2,600		1,081		15,160
2018	4,012		4,522		2,100		964		11,598
2019	4,012		—		1,400		801		6,213
2020	4,012		—		1,400		407		5,819
Thereafter	6,023		—		6,767		357		13,147
Total expected amortization	$	26,083	$	19,456	$	16,867	$	4,691	$	67,097